Get ready for the election promises. And consider whether anything needs fixing
Next year is a presidential election year, and candidates from both political parties will be making campaign promises about tax and spending policies designed to “fix” our economy.
As you listen, consider whether anything really needs fixing and consider the limitations of all government economic policies.
First, by traditional measures the U.S. economy has rarely been better. The national unemployment rate is at a 50-year low, and the annual change in our cost of living (i.e., inflation) has remained below the long-run average of 2 percent for a decade now. Idaho’s employment and real-wage gains have closely tracked these national trends.
Even the U.S. international trade position continues to improve. The monthly deficit in goods and services trade is lower than it was in 2008, despite a 31% increase in the total volume of imports since then.
Candidates for office will likely brush off these favorable economic conditions and argue that something must be done. Most often, these claims take the form of some new fiscal policy.
Fiscal policy is the setting of government spending and taxation by government policymakers. How well such policies work at helping the economy depends on consumers’ marginal propensity to consume, that is, the fraction of extra income that a household consumes rather than saves. If we save more, the effect on the economy from any fiscal policy change is rather small.
A somewhat surprising trend during the current economic upturn is higher household savings. Saving as a percentage of disposable personal income has more than doubled since 2008.
Even if a new tax or spending policy was to be considered in 2020, many would ask how can we afford it. The federal government is running an annual budget deficit or $1 Trillion dollars, or 4.6% of gross domestic product. Without cuts to other government programs, new spending is unlikely to be approved.
What then should candidates promise? Perhaps they should pledge to not try and fix what isn’t broken. Even Keynesian economists agree that fiscal policy is ineffective during times of economic growth and that attempts to “fine-tune” the economy are likely to fail.
Candidates for political office can’t see any better than the rest of us. Don’t fall for all the economic promises coming this next year.
This story was originally published December 19, 2019 at 2:09 PM.